Global trade like a drunken sailor

A couple of weeks ago there were several articles about how the Baltic Dry Index (BDI) was out of favour.    Or to be more precise, that it had lost its relevance.  Too much shipping supply and not enough global demand had compounded within the index to push it to the lowest level in recorded history.  One article in the Telegraph (I think) suggested that the ships are worth more as scrap than for the primary purpose. 

For those who are unfamiliar with this index, Seekingalpha.com describes it as:

The BDI is a shipping and trade index created by the London-based Baltic Exchange that measures changes in the cost to transport raw materials such as metals, grains and fossil fuels by sea. The Baltic Exchange directly contacts shipping brokers to assess price levels for a given route, product to transport and time to delivery (speed). For shipping companies, a higher BDI is better than a lower one as it means that they will get to charge more for their services.

I was going to write about it back then, that the articles were simply wrong.  The index is doing no more than it should, showing exactly where the global economy is functioning.  There is oversupply in many parts of the economic world:  labour, money, cars, trucks, houses etc etc, and shipping.  And whatever index you follow, when that happens indexes go down when the bubbles burst.

But the blog didn’t get written, and now if you search for news on the web for the Baltic Dry Index, there is an enormous number of news articles.  Why?  Because the index is, like a drunken sailor, lifting itself off the floor.  Up more than 60% in the past few months. 

And seekingalpha.com explains in its article why the various shipping companies are good investments right now.  And the arguments are strong – with Price/Book discounts of 80% or more.  Assuming that they do not go bankrupt before, any minor improvement in global economy will reap substantial rewards with small movements in the share price.  And many an international investor has made their money buying ships cheap and selling them into a growing market.  The Greek shipping magnates come to mind. 

But you know what?  This just doesn’t look like a resuming global boom to me.  It looks like a drunken sailor.  But there is one thing for certain, the index is not broken.  It is telling you that the global economy continues to be severely tough.